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Writing A New Social Contract

March 10, 1996

Cover Story

WRITING A NEW SOCIAL CONTRACT

O.K., job security is dead. What happens from here?

For more than a century, since railroads and steel mills first overran a nation of farmers and entrepreneurs, the question of corporate obligation has vexed and divided Americans. What does business owe its workers? What is its social responsibility? Should investors call all the shots?

Corporate America, by and large, clings to faith in the restorative powers of the marketplace: "The idea of corporations taking on social responsibility is absolutely ridiculous," says Chrysler Chairman Robert J. Eaton. "You'll simply burden industry to a point where it's no longer competitive." Meanwhile, liberal intellectuals, bizarrely reinforced by Pat Buchanan's populist rhetoric, have returned to the comforting vision of a "stakeholder economy," where a company's employees, customers, and communities enjoy legislated rights.

THIRD PATH. In the real world, neither solution is completely satisfactory. Americans want something more substantial than an invisible hand: 95% of 1,004 adults surveyed in a BUSINESS WEEK/Harris Poll rejected the view that corporations' only role is to make money. Yet people also say they're leery of regulatory intervention. "Business works better if government stays out of it," says Doug Rees, 31, a Dallas attorney.

And so, in isolated pockets of Corporate America, a middle path is slowly emerging, one that reflects a new paradigm for business and society in a global market. It recognizes that job security died with the 1980s--but concedes, too, that employers bear an obligation to help workers through transitions. And it attempts to align the interests of investors, managers, and employees, aiming to share both the risks and the rewards of doing business.

Why should employers buy into this? Certainly, the profit motive remains as relevant as ever: Companies that can't compete are the ones that shed jobs and abandon communities. "My company is directly responsible for the livelihood of some thousand people. I consider that my contribution," says Errol Smith, whose small Glendale, Calif., company negotiates building-maintenance contracts.

But a nod to stakeholders can produce results. At Starbucks Corp., which provides all employees--even part-time store clerks--with health insurance, stock options, and training and career counseling, worker turnover is less than 60% annually, well below the 300% restaurant industry average. When Pinnacle Brands Inc. lost $40 million of trading-card business to the 1994 baseball strike, it challenged workers to come up with new products and cost-cutting ideas; they did, and sales jumped 80% in two years. No jobs lost.

THINKING AHEAD. Indeed, the new paradigm says layoffs are not inevitable. Rather, stability is both more effective and easier for society to take. "Here's the challenge for business leadership: to manage continual improvement in your competitive position through a smoother management process so you'll see less dramatic dislocation," says Thomas P. Gerrity, dean of the University of Pennsylvania's Wharton School.

The old way: Wells Fargo Co. makes a hostile bid for First Interstate Bancorp., threatening 8,000 jobs and enraging Californians. The new way: Steel producer Nucor Corp. manages downturns by gearing down to four-day workweeks; employees lose pay but keep their jobs. Southwest Airlines Co. avoids job cuts by sticking to its low-cost strategy through good times and bad; workforce stability, it thinks, gives it an edge over rivals.

Before the ax does fall, companies can help workers enhance skills that can get them work elsewhere. A growing number of academics and consultants advocate this notion of "employability" as the basis for a new social contract: With no job guaranteed, individuals are responsible for keeping themselves marketable, but employers are obliged to offer resources for self-evaluation and training.

Deluxe Corp., for one, announced in January that it would close 26 of its 41 check-printing plants. But new CEO John A. Blanchard III elected to stretch the shutdowns over two years and increased the company funding for education to up to $7,500 per worker annually, from $2,000. "Companies owe it to their employees always to upgrade skills," he says.

Executives and academics say employability programs produce a committed workforce willing to innovate and take risks. The problem: They're expensive, and the nebulous results--borne out over an employee's lifetime--are difficult to quantify. Though committed in principle, many companies are wary of investing in workers who may take their skills to another employer. "They are still struggling with it," says consultant Judith A. Waterman. "No one has the real answer."

BIG DIVIDE. They're also wrestling with the matter of pay. While not everyone is offended by big executive paychecks, workers resent the CEO who profits at their expense. AT&T has shed 125,000 jobs since 1986, but CEO Robert E. Allen's salary and bonus has jumped more than fourfold, to $3.3 million in 1995. Though he took a $200,000 pay cut last year, he also won options worth $9.7 million. No wonder the troops are outraged. "People at the top are stealing from people at the bottom," says William Bessesen, a Denver resident who left his job at an office-supply company after it was acquired.

The question isn't so much who should get the spoils: Few argue that investors shouldn't be rewarded for their capital. Rather, the idea is to make workers' motivation consistent with that of managers and investors. "We share the pain and share the gain," says Nucor CEO John D. Correnti. At Nucor, every employee's pay depends on the steelmaker's profitability. IBM workers will get 8% average pay and bonus increases this year for exceeding 1995 profit targets. Joseph P. Sullivan, chairman of fertilizer giant Vigoro Corp., limits his own salary to 20 times that of $25,000 entry-level workers. "Everybody should pay if a company is having a bad year--or a bad decade," he says.

The possibility that such strategies can drive performance intrigues some executives. Even more compelling is the threat that popular discontent with Corporate America will encourage restrictive laws, such as that proposed by Senator Edward M. Kennedy (D-Mass.) to require companies to report on social responsibility efforts. "If it takes too myopic a view of its responsibility, business will be put on the receiving end of ill-conceived legislation," says Jeffrey A. Garten, a former Commerce Under Secretary, now dean at the Yale University School of Management.

It has happened before: Unionism and ever-expanding regulation were the products of earlier bouts with economic anxiety, of a sense that the shareholder/stakeholder balance was out of whack. Now, Americans say they would favor tax incentives to reward employers that preserve or create jobs. What they really want is for companies to ease the pain of transition and share in the sacrifices required. Far better for employers to figure that out on their own.By Keith H. Hammonds in New York, with Wendy Zellner in Dallas, Richard Melcher in Chicago and bureau reportsReturn to top